Q4 2022 Hayward Holdings Inc Earnings Call
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Welcome to Hayward Holdings' fourth quarter 2022 earnings call. My name is Danielle and I will be your operator for today's call. At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session.
During the question and answer session. If you have a question. Please press Star then one on your Touchtone phone. Please.
Please note this conference is being recorded.
I will now turn the call over to Kevin Masco.
Vice President of Investor Relations. Mr. <unk>, you may begin.
Thank you and good morning, everyone. We issued our fourth quarter 2022 earnings press release this morning.
Which has been posted to the Investor relations portion of our website at Investor <unk> Dot com.
There you can also find an earnings slide presentation that we will reference during this call.
I'm joined today by Kevin Holleran, President and Chief Executive Officer, and IV, and Jones, Senior Vice President and Chief Financial Officer.
Before we begin I would like to remind everyone that during this call. The company may make certain statements that are considered forward looking in nature, including management's outlook for 2023 and future periods.
Such statements are subject to a variety of risks and uncertainties, including those discussed in our most recent Form 10-K and Form 10-Q filings with the Securities and Exchange Commission that could cause actual results to differ materially.
The company does not undertake any duty to update such forward looking statements.
Additionally, during today's call the company will discuss non-GAAP measures reconciliations of historical non-GAAP measures discussed on this call to the comparable GAAP measures.
Can be found in our earnings release, and the appendix to the slide presentation.
I would now like to turn the call over to Kevin.
Thank you Kevin and good morning, everyone. It's my pleasure to welcome all of you to Hayward fourth quarter earnings call.
I'll start on slide four of our earnings presentation with today's key messages as we continue to navigate a very dynamic operating environment I am pleased that our fourth quarter performance was in line with expectations consistent with the outlook, we communicated a quarter ago. Our results reflect the continued reduction of channel inventory days on hand, I will make additional call.
Comments on our expectation for channel inventory in a moment second we took proactive steps during the second half to realign our cost structure to current market conditions, while maintaining our strategic growth investments and productivity initiatives. This includes successfully executing the previously announced enterprise cost reduction program.
Which was designed to drive substantial barrick variable cost reductions and structural SG&A savings of approximately 10% on an annual basis under this program, we delivered approximately $9 million in SG&A savings in the fourth quarter and are on track to deliver the full annual savings of 25% to $30 million in 2023.
Third Hayward is a long standing commitment to lean manufacturing and continuous improvement we view operational excellence as a significant competitive advantage, we demonstrated our agile manufacturing capabilities throughout the year continuing to ramp production in the first half to deliver on our record backlog than reducing production in the second half.
Structural margins during a period of declining volume and reducing channel inventory days on hand.
Fourth we continue to strengthen <unk> position as the Premier company in the attractive pool industry. We are seeing positive market reception of our innovative new products and are actively converting target accounts to increase hayward's dealer base. Finally, we are introducing full year 2023 guidance.
We delivered tremendous growth in recent years building upon our strong installed customer base that we expect will drive aftermarket sales for years to come compared to 2019, the last pre pandemic year, our 2022 net sales and adjusted EBITDA represent increases of 79% and 113% respectively.
Given current global economic conditions and difficult comparisons to this period of extremely strong growth. We now expect sales to reduce in 2023 before resuming our historic mid to high single digit growth trajectory. We see 2023 is a year of continued channel inventory recalibration with our net sales into the <unk>.
<unk> meaningfully below sell through this headwind will partially be offset by the adoption of innovative new products disciplined price cost management and operational excellence for the full year 2023, we expect net sales to reduce approximately 18% to 22% and adjusted EBITDA of 265.
5 million to $285 million, turning now to slide five highlighting the results of the fourth quarter and full year net sales in the fourth quarter reduced 27% year over year to $259 million largely due to lower volumes related to channel inventory movements and softer conditions in certain markets, especially <unk>.
We're up in Canada. We are encouraged by continued positive price realization during the quarter more than offsetting inflation and the success of our innovative new solutions.
Adjusted EBITDA in the fourth quarter was $53 million with a margin of 26%, we realized manufacturing cost savings and the initial SG&A savings under our cost reduction program to support structural margins as production volumes declined.
Just that EPS in the quarter was 11.
For the full year 2022, net sales reduced 6% to $1 3 billion with adjusted EBITDA of $368 million each consistent with our guidance. Despite our reduced net sales into the channel. Our primary channel partners delivered record sell through revenue of Hayward products into the core U S market.
In 2022, adjusted EBITDA margin was a healthy 28% adjusted EPS for the full year was <unk> 98.
Turning now to slide six for a business update and consumer demand continues to vary significantly by region, while underlying demand trends are moderating in North America. The sunbelt continues to be an area of relative strength driven by secular trends related to demographics and outdoor living we are seeing softer trends and more seasonal.
<unk>, such as the northeast U S and Canada within Europe , and rest of World. We continue to see solid growth in the middle East and southeast Asia, whereas conditions are especially challenging in northern Europe .
We estimate that Hayward captured significant market share over the last three years. We believe this trend is more structural than transitory.
This was most notable in the strategically important U S Sunbelt region and in critical products in the pool pad like controls variable speed pumps and water standardization are strengthening Iot digital leadership position is driving the development of connected products within our omni automation ecosystem the market is.
[laughter] favorably as we continue to gain traction with dealer additions in our totally Hayward loyalty program turning to price versus cost dynamic a series of out of cycle price increases where required over the last few years to combat inflation and protect structural margin profile of that business, while we have seen some commodity and freight costs.
Our to ease total cost inflation remains elevated as a result, we implemented the previously announced price increase of 4% to 5% at the beginning of January the pool industry has been very disciplined on price historically and we expect the recent price increases to hold.
Our channel partners continue to recalibrate the level of Hayward inventory to be appropriately positioned relative to current market conditions in the second half of 2022 distributors reduce days on hand as expected after a meaningful inventory build during a period of strong demand and significant supply chain disruption based upon channel information.
<unk>, we estimate that our sell through increased 11% in the U S. On a full year basis to a record level. However, as I mentioned, we now believe the distribution channel will make additional reductions in 2023 as a result of a softer global economic outlook lower safety stock requirements due to normalized lead.
Times and higher costs of carrying inventory, we believe the channel will trend towards the low end of historical ranges for inventory days on hand over the course of the year and we have reflected that in our outlook. Our 2023 guidance now contemplates an additional reduction in channel inventory days on hand, with the first quarter.
<unk> most significantly we took proactive and responsible actions during the fourth quarter to streamline the organization and optimize the cost structure to support margins. This includes a reduction of variable cost in our manufacturing cost base and supply chain to maintain attractive gross margins in the mid to high Forty's. In addition, we.
To deliver structural SG&A savings of approximately 10% on an annual basis or <unk> $25 million to $30 million. In 2023. These actions are intended to maintain a high twenty's adjusted EBITDA profile. Finally, ESG is very important to Hayward and our shareholders. So I am pleased to report continued progress on our journey.
In 2022, we developed our ESG strategy and framework, which aligns to products people planet and principles and completes our first scope one and two emission inventories in partnership with a third party expert. These results in other reporting metrics are included in our first standalone disclosure the Hayward ESG data sheet.
Which we published on our website during the year I would encourage our shareholders to review these new disclosures turning now to slide seven I'd like to share some perspective on the companys competitive moat that strength that strengthens our market position and drive growth for our shareholders.
Starting with the one o'clock position on the Pie chart, we have an incredibly strong and trusted brand decades in the making and one of the largest installed base of that comes from having a complete product line across all pool types. This provides ample opportunity to introduce new technologies into the aftermarket which is the primary driver of our business at approximately 80% of.
Sales next is our strength across multiple channels as we revamped our go to market model to drive growth. This included restructuring the sales force and introducing dedicated business development teams focused solely on new customer acquisition. The result has been continued growth in the number of pool builders remodelers and servicers to our totally.
Loyalty program that stake their reputation on Hayward products every day in the backyard. We also introduced a unique E. Commerce approach that resulted in true multichannel capabilities across distribution retail and online moving around the chart Hayward has committed to operational excellence and continuous improvement and we saw.
Substantially improved our manufacturing and supply chain capabilities in recent years, we primarily manufacture domestically with approximately 85% of our production in the U S. We are vertically integrated with shorter supply chain than others. Our facilities are highly automated and agile with the proven ability to flex up and down.
As appropriate with limited incremental capital finally, one of our biggest differentiators is our product and technology leadership, which I will discuss on the following slide these important elements of Hayward sustainable competitive mode form a strong foundation for profitable growth longer term turning to slide eight.
I'd like to provide some additional detail on our industry, leading products and technologies, while operational excellence and customer service are ingrained in our culture at its heart Hayward is a product company recent launches have showcased hayward's focused new product development strategy key product categories have been identified as must win with the goal of delivering.
Compelling products capable of attracting both new customers as well as expanding our total addressable market by driving incremental content into lower technology cools and the installed base, we prioritize investment into these product categories leveraging in house core competencies to deliver innovative patent protected solution.
<unk> is designed to make will ownership easier more affordable and sustainable.
They are key to driving growth and market share gains a few of these recent introductions are shown here on the slide our variable speed and XC pump deal compliant platforms lead the way in energy efficiency and are responsible for our energy star partner of the year Award omni.
<unk> continues to be the Iot automation platform of choice, our Apple forwards effortless and simple use for both the homeowner and trade professional hydro pure as a novel III in water treatment technology, combining UV with ozone and MLP to.
<unk>, the safest yours and clear this quarter.
The new S through Aqua rate builds on our best in class Salt Coronation platform, providing the ability to operate at one third the salt concentration of legacy designs and offering unique control capability. Our led lighting solutions span pool Spa water features and now landscape simplicity of installation and.
Control was recently added through the introduction of smart power.
Finally, the new Universal HC heater offers dual fuel capability and combines efficiency and performance in the industry's smallest footprint easiest to install either to summarize technology leadership is central to our growth strategy. We are very proud of our recent innovations we continue to prioritize investments into new product.
<unk> to further strengthen our competitive positioning and support our customers with industry, leading products and technologies with that I'd now like to turn the call over to IV and Jones, who will discuss our financial results in more detail.
Thank you Kevin and good morning, I'll start on slide nine all comparisons will be made on a year over year basis net sales for the fourth quarter decreased 27% to $259 million. This was in line with our expectations and primarily driven by a 36% reduction in volume and a 1% unfavorable foreign exchange.
Jim <unk>, partially offset by 9% from price realization and 2% contribution from acquisitions.
The volume decline during the quarter was primarily driven by distribution channel inventory movements, which were anticipated as we entered the quarter.
Gross profit in the fourth quarter was $109 5 million gross profit margin declined 466 basis points to 42, 3% as continued strong price realization was offset by lower operating leverage on reduced production volumes selling general and administrative expenses during the fourth quarter with.
<unk> with the prior year period to $65 million, representing 23% of net sales as a reminder, the fourth quarter 2021 benefited from a 5 million favorable non recurring item related to insurance proceeds from the from a property claim.
We realized approximately $9 million and structural cost savings in the fourth quarter of 2022, adjusted EBITDA was $53 3 million in the fourth quarter and adjusted EBITDA margin was 26% our effective tax rate was 32% in the fourth quarter compared to 18, 4% in the <unk>.
Year period, the year over year change was primarily due to the timing of discrete items adjusted EPS in the quarter was 11 <unk>.
Fully diluted share count has decreased 25 million shares or approximately 10% of shares outstanding primarily the result of the share repurchases completed during the first three quarters of 2022, turning now to slide 10 for a review of our full year results net sales for the fiscal year 2022 decreased 6% to $1 three.
$3 billion. This decrease was in line with our guidance and primarily driven by a 20% reduction in volume a 2% unfavorable foreign exchange impact.
We offset by 13% from price realization and a 2% contribution from acquisitions gross profit for the full year was $597 million gross profit margin declined 135 basis points to 45.
4%, a strong price realization to combat inflation was offset by lower operating leverage on reduced volumes in the second half.
We invested $22 million in our DNA and engineering.
In 2022 to support our commitment to growth and innovation SG&A expenses for the year declined 7% to $249 million driven by lower discretionary and volume based expenses plus the initial benefits of our cost reduction program on a full year basis SG&A as a percentage of net sales was <unk>.
19% adjusted EBITDA was $367 $6 million with an adjusted EBITDA margin of 28% for the full year our.
Our effective tax rate was 23, 4% and 22 compared to 21, 7% in 2021 adjusted EPS was <unk> 98 for the full year 2022 now.
Now I'll discuss our reportable segment results beginning on Slide 11, North America net sales for the fourth quarter declined 27% $216 8 million driven by 38% lower volumes, partially offset by 9% favorable price impact and 2% contribution from acquisitions the.
And volume was largely due to the anticipated right sizing of the channel inventories gross profit margin was 43% and adjusted segment income margin was 21, 8%.
Turning to Europe , and rest of World net sales for the fourth quarter decreased 23% to $42 $2 million net sales benefited from a net favorable price increase of approximately 7%, but were adversely impacted by 25% decline in volumes as well as a 5% headwind from unfavorable foreign currency.
<unk>.
Gross profit margin was 38, 8% and adjusted segment income margin was 19, 9% turning to slide 12 for a review of our reportable segment results for the full year.
North America net sales declined 5% to $1 1 billion.
Driven by 21% lower volumes, partially off set by 15% a favorable price impact and 2% contribution from acquisitions gross profit margin was 46, 4% and adjusted segment income margin was 37% of sending to Europe and rest of world net sales for the full year decreased 50.
1% to $205 3 million benefiting from a net favorable pricing increase of approximately 8%, but adversely impacted by a 17% decline in volumes and a 6% headwind from unfavorable foreign currency translation.
Gross profit margin was 40% and adjusted segment income margin was 23, 6%.
Turning to slide 13 for a review of our balance sheet and cash flow highlights. We ended 2022 with total liquidity at $268 million, including the cash and cash equivalent balance of $56 million and availability under our undrawn credit facilities of $212 million net debt to full year 2002.
Turning to adjusted EBITDA was two nine times, we will not make an excess cash flow payments and 23, given our credit agreements permit deductions for capex share repurchases and M&A activities cash flow from operations was a use of $28 million in the fourth quarter reflected an increase in accounts receivable driven by early.
<unk> cash flow from operations was $116 million for the full year working capital use in 2022 was comparable higher primarily related to the highest safety stock positions. We took in certain raw materials and finished goods inventories peaks at the end of the second quarter 2022 and declined by 29.
$1 million or 9% in the second half.
Capex of $6 million in the fourth quarter was consistent with the prior year period for the full year capex of $30 million compared to $26 million in 2021, as we continue to invest in highly efficient automation into our production facilities.
Free cash flow was $86 million for the full year 2022.
The business has strong free cash flow generation characteristics, driven by high quality earnings, which support our growth investments.
Turning now to capital allocation on slide 14, we will maintain a disciplined financial policy, our capital allocation priorities will be balanced emphasizing strategic growth investments and shareholder returns, while we maintain prudent financial leverage. We also remain an acquisitive company, having successfully integrated Florida quiet.
Companies in the last 18 months, which contributed 2% of sales growth in the full year 2022.
Finally strong free cash flow generation supports opportunistic return of cash to shareholders, we deployed $343 million to repurchase two 3 million shares in 2022 entering 'twenty three we had $400 million remaining on the existing $450 million three year share repurchase oil.
Alright station.
Turning now to slide 15 for the main trends supporting our outlook, we remain very positive about the long term health and growth profile of the pool industry, particularly the strength of the aftermarket with that said for the full year 2023, the company anticipates a decrease in consolidated net sales of 18 to 22.
This outlook reflects resiliency in the North American non discretionary aftermarket are reductions of approximately 20% to 25% in new construction and discretionary remodel and upgrades, whereas in Europe and rest of the world, We expect reductions Maureen.
More in line with 25% as geopolitical circumstances negatively impact consumer sentiment in that region.
These decreases will be partially offset by a 4% to 5% net sales contribution from price increases initiated at the beginning of the year included in our guidance. He has an additional reduction of channel inventory as a consequence of the reduced consumer demand in 2023, a reversion to normal supply chain on the higher cost of capital.
We expect our channel partners to adopt a lean inventory position given these dynamics are moved to the lower end of that design days on hand and targets.
We expect to revert towards more normal seasonality in 2023, However, we expect channel inventory right sizing the impact of first quarter, most significantly with net sales trending below the typical seasonality in this first quarter.
We expect gross profit margins to increase in 2023 due to incremental positive price realization and executed productivity initiatives. We anticipate full year 23, adjusted EBITDA in the range of $265 million to $285 million. We are on track to deliver the target of SG&A cost savings of 25.
It's a $30 million in 2003 on Incrementals $16 billion to $21 billion extra achieving approximately $9 million in 2022. These savings will be partially offset by increasing wage inflation and variable compensation. We also expect a strong improvement in free cash flow in 'twenty, three as we reduce our own inventory levels.
This should result in more typical free cash flow conversion of greater than 100% of net income with free cash flow exceeding $150 million.
Finally, we expect interest expense of approximately $78 million reflect an increasing interest rates and borrowing levels. We also expect a modestly higher effective tax rate of approximately 20 to.
25%.
And capex spending consistent with the prior year at $25 million to $30 million as we continue to support the business and invest for growth.
We are confident in our ability to successfully execute in this dynamic environment and remain very positive about the long term growth outlook.
With that I'll now turn the call back to Kevin.
Thanks Ivy.
I'll pick back up on slide 16, before we close let me reiterate the key takeaways from today's presentation. We delivered fourth quarter results that were consistent with our expectations. We are controlling what we can control optimizing our manufacturing base and taking proactive steps to realign our cost structure to current conditions, while positioning for future growth.
Our agile manufacturing capabilities provide a significant competitive advantage as we flex production as appropriate to satisfy demand and maintain margins. We continued position Hayward as a premier company in the attractive pool industry as we innovate and support our customers with best in Class Award winning products and technologies finally.
Our 2023 outlook reflects continued near term headwinds related to macroeconomic conditions and channel destock, but I have every confidence that we have the right strategy and talent in place to drive compelling financial results and shareholder value creation with that were now ready to open the line for questions.
Okay, operator, I think we're ready for Q&A.
Okay.
Okay.
Okay.
It appears that we're having a technical difficulty if everyone could just stand by we'll be right back to the Q&A session momentarily.
Yeah.
Apologies for the delay we will now begin the Q&A session, if you'd like to ask a question on today's call you can do so by dialing star one.
If you'd like to remove that question for any reason you can dial star two.
Again to ask a question Star one we'll pause briefly to our questions to generate in Q. We do ask that you limit yourself to one question per.
Sure Great question.
The first question is from the line of Ryan Merkel with William Blair You May proceed.
So Kevin I wanted to start off with a high level question on 2022.
Can you talk about the bigger accomplishments and some of the bigger changes for the company in 'twenty two as you address the changing market and then wanted to set up a stronger twenty-three.
Sure. It's good to hear from Euro Ian Thanks for the question.
You know I think 'twenty, two we accomplished quite a bit to be proud of.
On a full year 22 performance finished in line with recent expectations.
From a sales and an adjusted EBITDA standpoint, I think importantly that 28% adjusted EBITDA margin after an incredibly strong first half.
And a slower second half is something that we take great great pride in.
Also as I mentioned in the prepared remarks this record sell through of Hayward product into the key U S market in that low double digit setting a record.
It's a great accomplishment as well in the process providing share gains in some key categories like variable speed pumps controls solve alternate sanitizers early day to name a few so.
I think importantly, we saw the need for some channel destock and reduction of days on hand, but we got after that.
In the second half of the year and got to really where we were where we were expecting which was getting back to year end 2019 levels, which was as you know the the last pre pandemic. So.
I think I would probably close with just returning over 340 million to shareholders. During the year I think all of those great accomplishments and set us up.
Well or for 2023, which will be I think a bit of a recalibration.
Before we get back to that more historical mid to high single digit growth rate.
Got it thanks for that and then my follow up just on 'twenty three revenue guidance can you talk about your assumption for U S retail sell through and then how much inventory destocking estimating in 'twenty three.
Yeah as it pertains you did specifically ask about North America right Ray.
Yeah right.
Around our.
In our assumptions for 2023, let's just talk about the.
The key components from a revenue standpoint.
From a remodel and upgrade standpoint was about 30% of our mix, we're seeing somewhere around 20% reduction in units.
New construction.
As I think most people are coalescing around that's 20% mix and we're calling for between 20 and 25% reduction there I think on the non discretionary kind of this 50% of our mix, which is very resilient I think that we would say that theres a potential for it.
Maybe 5% unit reduction there as maybe there's some deferred maintenance or as things break not.
Everyone may not upgrade to the most current version so.
Net of that is about 4% price. So I think that that's about call it 10% or so headwind going into 2023, and then beyond that is what we would expect for additional channel destock, which gets us up into that call it 18% to 22%.
Our overall guide.
I'll just mention Europe , you know I think we're taking a little bit more of a cautious view around new construction and discretionary upgrades of course, there's a little bit of setback.
FX headwinds in our in our expectation so were modeling somewhere between 20 and 25%.
For that segment.
Perfect I'll pass it on thanks.
Thank you. The next question comes from Jeff Hammond of Keycorp.
These proceed.
Hi, good morning, everyone.
Good morning.
Hey, so.
Really I want to give it the decrementals it looks like in your guide your Decrementals are kind of 35% and you're holding the line pretty well in and.
You know I guess fourth quarter. It seemed like the Decrementals were worse and you got some of your SG&A savings. So I just want to understand kind of the confidence in holding the decrementals in what.
Other offsets you're thinking about whether it be disinflation or.
Less disruption et cetera kind of built into that.
Yeah, Hi, it's IBM derived the beckman level forecasting for next year of 35%, which is more in line with the historical movement, we see on Incrementals Decrementals.
A little bit more severe in.
In Q4 last year, but as we've noted in the prepared remarks it was really.
A period in which we recalibrated our cost base, both at the manufacturer level as well as the SG&A level as we enter 2023, we believe we're in a great shape in the in the cost base, both at the factory level and in SG&A to deliver those.
Limited Decrementals to 35%, we do have obviously upwind astro tailwind and upside to the extent that we do see some further improvements in areas like freight costs, which have improved over the last six months, but that could be a tailwind to 2020.
Three but at this particular point, we believe on the construct of our forecast.
Our manufacturing cost base, and SG&A base right sized to deliver the outlook that we've provided.
Okay. That's helpful.
Maybe just can we just talk about normal seasonality because it seems like 19, there were some destocking.
22 was just odd so I don't know if you can frame how to think about kind of normal seasonality in that first quarter in particular.
Yes, you're right I mean, typically when we think about a year. If we go back pre pandemic and look at the preceding five or six years, our first half.
Was that 48% of the full year and second half, 52%, we believe that is.
Is going to be a reality in 'twenty, three where it may be.
Slight reduction in Q1 compensated by a little bit more in Q2, but we're trending back to a normal seasonality, which is low Q2 higher sorry, low Q1 Q2 as the season gets well underway lowered Q3 as the season comes to an end at a higher Q4 as we start to prepare for the fall.
Come in 2024 season.
Okay very helpful. Thanks, guys.
Thank you. The next question comes from Nigel Coe of Wolfe Research. Please proceed.
Thanks, Good morning, everyone. Thanks Felicia.
I just wanted to dig in a bit more to the 23.
The build and in particular, the repair and maintenance I think Kevin you said, maybe down 5% in 'twenty three.
I understand the kind of the desire to be conservative I think he commented that given the GSE that you saw maintenance actually grow.
During that timeframe. So I'm just wondering you know.
With.
Unemployment of 3% in the U S.
At the feels like we're in a better position today than we were back then so just wondering why the conservatism of our you know that.
That's down 5% and maybe the things and pull forward et cetera. So just any any thoughts there would be helpful.
Yeah, I mean, what we primarily saw in the great financial crisis as I understand was really odd new construction took the took the biggest impact at that point in time.
I think to be to be pragmatic looking into 2023.
With some of the inflationary concerns.
I think it's I think it's I think it's wise for us to kind of look at that 50% or so that is very resilient to just say that as we as we get into the fourth quarter of this year I think people have the ability to maybe defer some of the maintenance or maybe not fully.
<unk> to the current version and maybe do more of a like for like year, depending upon what their discretionary income looks like at that point in time. So I don't think that theres anything bigger at play Nigel than just try and try to be a bit cautious when that might happen.
They start with this 50% of the of our revenue.
Yes.
Okay.
Perfect on that and then my follow on questions again digging a bit deeper into the inventory dynamics.
So it looks like about 10 points of headwinds baked in for inventory in North America, that's about $100 million I think of headwind I'm curious if you would expect the bulk of that hit in <unk> and then perhaps a little less than <unk> and then maybe just to frame kind of what impact you saw.
In the second half of last year.
Yes, so the second half of 2022.
I would say and obviously in the in the Q2 call is when we identified the need to to take days on hand out as we were starting too.
And the 2022 season, our objective was to get days on hand by the end of the year back to pre pandemic levels, which was 2019 would be that marker.
Yeah, we did that we accomplish that in the.
By the end of December kind of get back to those days.
Days on hand months on hand.
In the in the channel.
As the as the second half played out as we worked to finalize our 2023 guide I.
I would say some of the discretionary outlook for 2023.
It will continue to soften as it has I previously spoke around Remodels and new construction and whatnot. So.
With that view.
Having done good work in the second half of 2022.
That theres, a couple of things contributing to a desire to have less inventory overall, if there is if there's if there's less retail activity less inventory as required in the channel to service that I think secondly, offset most Oems are back to normal lead times, So we're able to.
To provide.
And more just in time now that the supply chain disruptions.
Are largely behind US and then thirdly, I would say, obviously inventory carrying costs are more expensive today than they were during the pandemic. So for all those reasons, that's really what what we accomplished in the second half of 2022, which I would say was a success.
And the need for additional.
Work to be done in the <unk> and the start of 2023 Nigel.
Okay, we'll follow up offline. Thank you very much.
Thank you. The next question comes from Rob Wertheimer of Melius Research. Please proceed.
Thank you.
Kind of a similar question to what Michael just asked but on the upgrade and remodel side can you contextualize the kind of rough outlook you gave for 'twenty three.
Prior recessions and as a follow on to that is that a pure forecast at this point or do you already have enough channel commentary and installer commentary or whatever to have kind of a real look at them at this point in the year.
Yes.
I'll jump in here.
It's aman.
When we think about beef.
The aftermarket we would say typically 50% of our aftermarket is non discretionary with resilience.
However, we argument to recognition of that.
It's a very unusual environment right now with the with the with the interest rate environment, a lot of discussion around where the economy goes hook to be cautious and prudent we've said.
That upgrading that takes place at a break fix time periods or when do you see an end of life asset count at the end of its life typically people are spending money to go to the latest upgrade that may be deferred in that that's reflected in our guidance. We think it's a very cautious view, but we want to be cautious as we as we start the year off here.
And in the beginning of 'twenty three.
In terms of in terms of remodel.
Michael.
We felt that the models before <unk>.
To see the install base, we do believe there's pent up demand for remodeling. However, again based upon the backdrop of the economy, we think very much similar to new construction that could be.
Case here or down Remodels.
In addition, <unk> add in the rate in the region of 20% to 25% across our across our business space.
Okay fair enough.
Kevin I think you've touched on in your prepared remarks that the.
The outlook brings channel inventory days towards the low end of prior ranges I mean, eventually that turns into a tailwind.
That destocking.
What scenario could could have on another year of channel destock. After this if at all assume a market fall apart I mean, you are at the very bottom of our ranges of inventory you're comfortable or essentially when we go in there and I'll stop there. Thank you.
Yeah. Thanks, Rob I would say that our expectation is that is that the channel correction in terms of days on hand will be completed.
In 2023, I don't think that base.
Based upon some of our conversations and again all of those factors that I mentioned, just a moment ago, while answering <unk> question I think plays into the fact that we can maybe just dip maybe below.
Normal.
Days on hand, and we can we will we will serve the demand in 2023 with slightly less overall days on hand and to your point that may provide some tailwind.
Into 2024, but that seems a long way off at this point.
Fair enough. Thank you.
Thank you. The next question comes from Saree <unk> of Jefferies. Please proceed.
Hi, good morning.
Hello. This is structural share gains I think you've talked about that being around two plant 2.5%.
What are you seeing now that supply chains have normalized on how do we think about you maintaining that.
Yes, I mean, each year are our top priority is is profitable growth, which implies share gains you know I'd say over the last two and a half to three years.
We've experienced share gains across some critical product categories, we view that as more structural than transitory.
For a number of reasons I think product introductions plays into it as reflected with our vitality index, which is up over 20%.
Some new dealer conversions indoor totally heyward.
Program with more folks in the backyard advocacy.
Advocating.
Hayward product I think we've seen great penetration specifically in some of the year round Sunbelt markets.
Markets.
And I feel that we're still really in the early innings.
Some of the adoption of new technologies be that controls or alternate sanitizers.
I think that we have great products to bring to the market and we will continue to see that upgrading opportunity with hayward products into the market.
Great. Thank you Mike could you just talk about the cadence of the remaining SG&A savings on how we should think about that impacting margins through 2023 and at the time of 24.
Yeah.
Yeah, So we have essentially a.
Completed all of the right sizing of our SG&A base as we closed out Q4, and so we enter 2023 and a very healthy position start realizing the entirety of the run rate savings of 25 to 30 million.
Per quarter, so youll see our SG&A base.
In.
In each of the quarters.
Rand.
$60 million.
Beginning in Q1, so we're in great shape entered the year with all of those savings back into our numbers and will realizing those as we come out of the gate.
Great. Thanks for taking my questions.
Sure.
Thank you. The next question comes from Michael Halloran.
Of Baird. Please proceed.
<unk>.
Hello, everyone. So two questions here quick first one when you look at the guidance back half of the year. It seems like Youre, assuming positive North American.
Growth, which makes sense given the destock comps how are you guys thinking about the underlying sell out in the channel as you get to the back half of the year is it still.
Down year over year at that point, it's just the Destocking Thompson is driving the year over year gains or is there something else going on.
Yeah, Hi, Simon Yeah. So no we expect the destocking to impact our sales into the channel predominantly in the first half we expect sell out of the channel to be.
Fairly consistently down over each of the quarters that are selling to the channel to pick up in the second half as we saw the bulk of the season seasonal year 'twenty four.
And then how are you thinking about capital usage here you always buy back in the fourth quarter, given where your guidance was language is a little bit higher here.
How are you guys still contemplating buybacks as you think about capital usage in 2023 or are there other priorities.
Yeah look I would say we remain disciplined claim on our capital allocation program.
The policy requires us to maintain leverage in the target range three times at the end of 'twenty. Two we were at two nine times.
Despite the lower guidance on EBITDA in 'twenty three versus 2010, we still do expect to close 23 out with leverage ratio leverage ratios up around 293 times at the end of the year driven by a meaningful cash flow generation and the focus is going to be a meaningful cash flow generation.
From the business, we've got excellent.
For use of capital other than the continued to pay down our net debt position throughout 2023, as well as invest through capex programs into the business.
That's helpful. I appreciate it.
Yes.
Okay.
Thank you. The next question comes from William Carter Stifel. Please proceed.
Hey, Thanks. So first question I would ask is going back to your own kind of inventory Youre drawdown plan I believe last quarter was $90 million drawdown, some that would imply an incremental $60 million, but I would guess your volume assumptions for next year are now different.
Relative to where they before and if I look if I read your free cash flow guidance correctly, you only got about 6% to $50 million of working capital. So could you help us frame how much potential upside there is to that 150 and free cash flow from drawdown, what youre planning your own inventory your own production, you're all parts of this thanks.
Yes sure.
As we previously communicated inventory in our own balance sheet midyear last year, we ran about $313 million, we reduced that down to $284 million by the end of the year.
When you think about year over year increased 22 versus 21 50.
50 million dollar increase in working capital of about half of that was inflation. The other one.
Half is divided between safety stock position, we took in acquired inventory through the J&J acquisition.
What we're forecasting for next year is to continue to reduce our own <unk> backlog target months on hand position all three months on hand for raw materials in two months on hand finished goods.
We don't quite get there by the end of the Mexican but with a super plus.
We've got all the plans in place to drive it and then in terms of free cash flow figure I quoted of 150 million gas there is upside to that.
If we can continue to drive inventory out of the balance sheet, which is our plan.
We want to be cautious.
About that I'll be won't be fully prepared for.
24 <unk>.
We recognized the guidance we have given is cautious, but we remain very optimistic about the start to next season, and we will gauge our level of inventory as we enter Q4 as being appropriate.
Not to support 24, but at this time.
Andrew there is upside to $150 million, but it's predicated upon what we believe our inventory needs to close out in 'twenty three 'twenty four season.
Thanks for that second question I would ask is I believe last quarter, you said pricing net of material cost inflation was positive that was in <unk>.
<unk> I'm not sure. If you said that today. So was it a positive did it accelerate and kind of how are you thinking about gross margin pricing relative to your cost for next year also recognizing I know you've got a very long inventory positions. So we've seen some favorability in cogs that might takeaway flow through thanks.
Okay.
Yes, that's exactly right I mean, we when we think about less hardware margins in Q4, they were impacted by the higher acquisition costs of raw materials at the backend of Q2 and into Q3.
That that rolls through our cost of sales in Q4, and that's behind US that we did start to see some tempering of inflation I want to be clear, we didn't see the inflation, but we saw some temporary, albeit patient and beautiful with child will start to benefit our.
2023 period, because we've also instituted now a price increase of 5% beginning January the first so we believe based upon that the institution of that new price the right sizing of our manufacturing cost base.
Continued reduction in freight costs over this time period that our gross margins will start to elevate back into the high <unk> by the time, we get through the end of Q2 and they will carry at that level through the end of the full year. So we're very comfortable in the projections that we put forward the high forty's.
Gross margin for this year predicated upon that price a normalization of trade coupled with.
A tempering of inflation of raw materials.
Thanks, I'll pass it on.
Thank you. The next question comes from Rafi.
<unk>.
Bank of America. Please proceed.
Okay.
Hi, good afternoon, Thanks for taking my question.
<unk>.
Kevin I'll just follow up on <unk>.
Some of your comments on sell out earlier just on the 11%.
For 2022.
Clarify that was revenue or units and then the same question for the 2023 outlook.
Are you expecting sort of down 10%.
Go out to the car.
Revenue and volume.
On the on the 2022 that was that was units.
Right.
Sorry could you could you could you restate the second part of the question right.
Yes.
The sell out.
Comment you answered the first one.
The 11% was on units not not revenue for 2023, what are you expecting on revenue.
Units for Brookdale out I think you said, 10%.
Without a volume number or revenue number.
So yes.
Yes.
Well, let's see.
Thinking about the 'twenty three guidance.
All of the metrics, we quoted 20% to 25% new construction and remodel.
The discretionary element of the aftermarket before all unit base figures.
Those will be offset by the.
Partially offset by the Arps on price increase that we put through beginning.
2020, let me think about when you might try and try to think when we think about the oes sell out.
What we're guiding down.
High single digits.
As an aggregate.
In the business on that is revenue sellout reduction year on year.
Got it okay.
These revenue.
Adding another I would add the difference to the guidance of the channel destock.
That's correct can you just remind us with 221, yes.
Can you remind us what the 2021 sellout was.
So we can sort of think about that.
How your sell in versus sell out has trended over the last few years here.
Yes, I believe 2021 rate was always mid twenties.
Okay sorry.
And then it's wrong.
That was right sorry that was our that was our expectation on sell out for 2022, we were actually mid thirty's on sell out for 2020 for 2021, sorry, Yes, I want to correct. The record we recalling for mid Twenty's in 2022.
And actually realized kind of low double digits after 35 or so.
Actual 2021.
That's really helpful.
Just on the <unk>.
Commented that your channel inventories youre expecting them to get the sort of historically low levels versus where they've been in the past is there anything structural about that where you'd expect that to continue into 2024.
Or as sellout kind.
Kind of stabilizes and there is more certainty around the economic environment would you expect the channel to try to return to normal level like could we see a restock at some point where sell in starting to track ahead of sell out and like how early could that happen.
Yes, I don't I don't think that that we're seeing or will experience a change forever more to lower days on hand, I think that this is this is in response to an interest rate environment or macro economic environment. That's.
Causing.
Carrying costs.
Packs.
Yes.
Is is impacted by.
An outlook or less discretionary are purchasing in the marketplace. So I do think that for a period of time will operate kind of less or lower than normal inventory levels, but I see ultimately that will get back to more historical days on hand, as we move through the different.
Quarters of the year that obviously changes how much you need how.
How much the channel wants on the shelf startups season versus exiting the season.
Our different our different numbers are different amounts so.
I'm not sure I'm ready to call when that when that.
Could occur.
Think that for the time being we're more focused on the on the destock and will continue to work closely with our channel partners for Windows historical levels will be restored.
Sure.
Thank you that's very helpful.
Okay.
Thank you.
Our final question comes from John Joyner of BMO. Please proceed.
Hi, good morning, Thanks for squeezing.
Squeezing me in here.
So on the fourth.
4% to 5% price increase that you implemented at the beginning of the year I guess can you remind us how much of the price increase increase.
Increases from last year carried over into this year and then.
Things normalizing a bit.
Much of the price increases have you historically realized in similar type of environment.
Understanding that distributors are typically.
Receptacle price hikes.
I'll start off by saying John that at 45%, which which took effect in January additive to that would be about 2% for half year.
Rap.
From my from our announcements mid year of 2022, so that's what would be.
Combined.
Just put the caveat that the contribution to revenue growth is lower given the reduced volumes in 2023, but those are the two those are the two pieces of.
That go into our tour, our pricing expectation for 2023.
Okay.
Okay.
Can you repeat the last question please.
Yes.
Yeah.
Yes.
Just with regard to us that things kind of normalizing.
And how.
How much of price increases have you historically realized in similar types of environments with fully understanding that distributors are typically receptive of price hikes, but youre, putting 34% to 5%.
How much of that would you expect to actually realize and I know you probably 4% to 5%, but what has been what has been the norm.
So we would based upon our view of history on our analysis of history that does.
<unk> never been any price give back John I mean, this industry has a disciplined pricing mechanism that's instituted at the beginning of the of the.
Seasonally yes.
It has been historically wanted to may be slightly higher.
This has begun the unusual.
Last couple of years, but we've not seen any price pushback of this time.
Nor do we expect any.
Equipment tends to be at the very low cost element of the overall cooler installed cost typically 10%.
As long as we can continue as a as an OEM to bring meaningful value based products to the consumer we believe price will remain very sticky as we go forward that we do recognize that promotional campaigns of rebates.
Maybe a little bit lighter.
<unk> two years that will revert to a more normal rebates for promotional activity structure in 'twenty three but.
Core pricing will remain sticky.
Thank you and with that we will conclude the question and answer portion of today's call I would now like to hand, the conference back over to Kevin Holleran for.
For closing remarks.
Thank you I'd just like to thank everyone for their interest in Hayward, our business is very well positioned to navigate the near term challenges and deliver value for all stakeholders. In the years ahead. This would not be possible without the hard work dedication and resilience of our employees and partners around the world. Please contact our team.
Do you have any follow up questions and we look forward to talking to you again on our first quarter earnings call. Thank you Daniela and you may now with the call.
And with that we will conclude today's conference call. Thank you for participating you may now disconnect your line.